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Those statements indicate that cost of goods sold of $1,730,804
and selling, general, and administrative expenses (including the
salary expense of MedChem U.S.A. employees working on Avitene
matters) of $2,789,224 incurred by MedChem U.S.A. were charged to
MedChem P.R. On its Federal income tax return for that year,
MedChem P.R. reported: (1) Taxable income of $5,862,541 and (2)
direct labor costs of $323,000. MedChem P.R. claimed a
$1,993,264 tax credit under section 936(a).
Discussion
The parties dispute whether MedChem P.R. may calculate its
1992 Federal income tax liability by using the Puerto Rico and
possession tax credit (possession tax credit) provided under
section 936(a). A domestic corporate taxpayer such as MedChem
P.R. qualifies for this credit if it meets the following
statutory requirements:
SEC. 936. PUERTO RICO AND POSSESSION TAX CREDIT.
(a) Allowance of Credit.--
(1) In general.--Except as otherwise
provided in this section, if a domestic
corporation elects the application of this
section and if the conditions of both
subparagraph (A) and subparagraph (B) of
paragraph (2) are satisfied, there shall be
allowed as a credit against the tax imposed
by this chapter an amount equal to the
portion of the tax which is attributable to
the sum of--
(A) the taxable income, from
sources without the United States,
from–
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